Falling Short

Thirty years after the fall of Saigon, and despite a plethora of foreign auto makers that have rushed to set up production in the country since then, Vietnam remains the smallest vehicle market in the Asia/Pacific region — with only 40,410 cars, trucks and buses sold in 2004.

While yearly sales have jumped as much as 100% in recent times, overall numbers are still too small to support all the producers that now are in the market. In comparison, Malaysia's automotive industry, one of the region's largest passenger-car markets, is 10 times the size of Vietnam's.

All together, there are 11 foreign joint ventures and 20 wholly owned Vietnamese enterprises. The major foreign players include GM Daewoo Vietnam Co. (VIDAMCO), which ranks No.1 in passenger-car sales; DaimlerChrysler AG; Ford Motor Co.; Toyota Motor Corp. and its truck-making unit Hino Motors Ltd.; Vietnam Suzuki Corp.; and Isuzu Motors Ltd.

The major domestics are Mekong Auto, Vina Star Motors Corp. (Mitsubishi Motors Corp./ Proton Holdings Bhd joint venture) and Vietnam Motors Corp.

And despite an industry forecast that sees car sales falling 25% for the year due to a recent 40% rise in a consumption tax on passenger cars, Honda Motor Co. Ltd. reportedly plans to invest up to $50 million in a new car assembly plant.

General Motors Corp.'s VIDAMCO last year held a 33% share of the passenger-car segment on sales of 5,112 cars, out of a total 15,510 units, racing ahead of No.2 Toyota and No.3 Ford. But despite a comfortable 13% overall market share, the small but profitable subsidiary cannot afford to rest on it laurels.

With the anticipated lowering of Vietnam's protective tariffs in compliance with regional free-trade pacts, VIDAMCO knows a wave of inexpensive imports soon will flood the country.

Indeed, many observers say the dream of a Vietnamese auto industry already is dead, despite the once hoped-for growth potential. After 10 years, local suppliers still contribute less than 4% of the nation's car parts, instead of the 30%-40% the government had planned.

Auto makers say the lack of domestic demand for cars means there aren't enough profits to sustain an auto-parts industry, dashing Vietnam's hope to nurture its car industry into a pillar of the economy.

And that is the curiosity of Vietnam. There currently are about 700,000 registered vehicles in use, concentrated mostly in Hanoi, Ho Chi Minh City (formerly Saigon) and other large urban centers. Of that, only about 100,000 are passenger cars, despite a population of 82.7 million people.

The transportation of choice for most people remains the lightweight motorbike, the same as during the Vietnam War years, with more than 12 million registered today. Put another way, that is 120 motorbikes to every 4-wheel vehicle on the road.

Because Vietnam's auto industry still is in its infancy, traveling the streets of Hanoi is chaotic, as there are no traffic signals or pedestrian-crossing lights. Crossing a wide avenue, pedestrians take their chances as a phalanx of motorbikes rush by in a tight stream, weaving and swooping in packs. Yet, accidents are seldom.

Auto makers in Vietnam complain there is no incentive to buy cars, due to the government's relentless import duties and taxes that drive up the purchase price to levels not seen in other parts of the world. Such a policy seems out of place for a country that has one of the lowest per capita incomes among the auto-producing nations.

Workers in the central region earn about $100 annually, and even college-educated couples in the major cities jointly earn just $6,000 per year. Much like China, passenger-car sales in Vietnam are on a cash basis.

Duties, tariffs, consumer sales taxes and ever-increasing local-content requirements are a constant headache for OEMs.

For VIDAMCO, that means the delivered price of its low-cost Matiz minicar is about $13,000 — double the price in other world markets — with more than half of that going to the government, says General Director and CEO Kim Jung-in.

Still, “we're GM Daewoo's cash cow,” Kim says, although he declines to specify how much profit his company delivers.

VIDAMCO's completely knocked-down (CKD) kit assembly is run like a maker of fine watches. There is no high-tech assembly line in the plant, not even an old-fashioned conveyor line.

Virtually all processes are highly labor-intensive, harkening back to the U.S. assembly methods of 50 years ago. Coating is the exception, although topcoats still are applied by hand-held spray guns.

Hwang Eue-Soon, director-technical affairs and production, says vehicles are shipped to Hanoi from parent GM Daewoo Auto & Technology Co.'s Bupyeong, Gunsan and Changwon South Korean plants.

They arrive as CKD kits, with all body panels crated in batch-lot shipments. The drivetrain, suspension and other components arrive separately.

The “cars in a box” arrive in lots of about 11 containers, each holding enough panels for 24 cars. The Matiz minicar is the exception, with panels for 48 complete cars shipped in a single container.

Assembly is performed on a batch-production basis, with one model line built at a time. The Hanoi plant assembles four different models, with nine trim levels, Hwang says. They include the Matiz S and SE, Lanos LS and SX, Lacetti 1.6L and 1.8L and the Magnus 2L and 2.5L 6-cyl. models.

The entire plant is manned by 150 workers, including operators, managers and engineers. The total complement, including the production workforce, is slightly more than 300 people, including five South Korean senior executives.

Body panels are first unloaded by hand from the crates. Operators then pick them up and place the panels on jigs, lock them down and spot-weld them together using pneumatically powered hand-held welding guns with claw-type clamping electrodes. There are no robots.

Although strictly a hands-on operation, quality is high; possibly because the cars are produced at a rate of just three per hour (24 per day), Hwang says, noting a highly motivated, well-trained workforce counts, as well.

Hwang says VIDAMCO is making every effort to comply with corporate parent GM's global manufacturing system requirements, albeit within an electronics-free facility, and therein lies the challenge.

Operators, for example, push vehicles in the body-in-white area on wheeled platforms. This continues through the assembly process until the built-up vehicle gets its wheels. Nevertheless, Hwang says quality checks and in-process inspection procedures are thorough and effective.

At three builds per hour, there is no need for elaborate high-tech quality measuring or sensing devices or automatic handling of parts. Everything is performed by well-trained hands and watched over with a discerning eye, he says.

Vietnam's 11 auto makers introduce new models or variants on their own erratic schedules year-round. There is no annual model changeover. The vehicle-to-vehicle competition stays fluid, with competitive strategic moves hard to predict.

Kim says when a competitor's new or revised model threatens to impact the popularity of VIDAMCO vehicles, he quickly requests upgrading and styling changes from South Korea.

GM Daewoo's Bupyeong Design Center makes the styling upgrades on the run, and revised body panels and upgraded parts and accessories are shipped to Hanoi in short order.

VIDAMCO's plant has the capacity to produce 10,000 passenger cars and 5,000 buses annually, but car production currently is at about half that and bus production is dormant.

When the company lands a bus order, which also arrives as a CKD kit, Kim quickly hires and trains new employees, transferring workers from the car plant as team leaders. The factory then is silent until the next order.

Kim's sales force also is effective, having outdone Toyota in the market. At present, the close-knit sales organization operates 32 showrooms. Of these, VIDAMCO runs two in Hanoi and one in Ho Chi Minh City. Contract agents operate the other 29 showrooms.

In the early years, Vietnamese car owners bought their cars and provided their own service maintenance as best they could, just as motorbike owners do today. But that has changed and car owners now expect full service from their dealers on a 24-hour basis.

Most of the agent-operated showrooms lack service facilities, and Kim is pushing hard to correct that. When a new agent is signed up, he is required to establish both a retail showroom and a full-service repair facility.

“One of our strengths is that we're operating a retail business,” Kim says. “We make direct sales contact with the customer through the agent and pay him a commission for handling the deal.

“Toyota, Ford and the other companies prefer wholesaling to independent dealers because it's safer and lower risk to deal with a stable dealer than with individual retail customers.”

Nevertheless, the sales force several years ago surprised Kim with a move that initially horrified him. “In 2002, I was afraid when I first saw a customer use a Matiz as a taxi,” he says.

Kim worried the mini Matiz and its diminutive 3-cyl. 0.8L engine wasn't up to the requirements of the tough taxi vocation. So he took immediate action to end what appeared to be a marketing disaster in the making.

“I negotiated very hard to try to buy back the cars to keep them out of the taxi fleets,” Kim says. “(The taxi drivers) wouldn't give in and, in fact, kept ordering the Matiz. So I finally gave up.”

Today most taxi companies in Vietnam use the Matiz, giving VIDAMCO dominance over the country's taxi market.

Kim says the company's goals are “to revolutionize the traveling habits of the Vietnamese people from 2-wheel to 4-wheel vehicles by offering the best value for money, reliability and a friendly environment.”

Still, the motorbikes he seeks to replace add a certain charm to their historic surroundings: women in long silky gowns perched sidesaddle on the passenger seat, parents clutching their children, vendors distributing their wares.

Swooping and swaying down crowded avenues in perfect rhythm, like the birds of the sky or the fishes in the streams, smoothly, with no collisions and with commendable harmony, they remain the pulse of Vietnam's transportation industry.

To experience firsthand the controlled chaos of Vietnam's traffic, you can view a short video at WardsAuto.com.